Hedge funds focused on investments in Emerging Markets posted steep performance declines over the previous three months as regional equity and currency markets fell dramatically, driven in part by the devaluation of the Chinese Yuan by the Chinese Central Bank.
The HFRI Emerging Markets Index fell -4.5 per cent in August, extending the three month performance drawdown to – 9.2 per cent, according to the latest HFR Emerging Markets Hedge Fund Industry Report, released today by HFR, the established global leader in the indexation, analysis and research of the global hedge fund industry. Total hedge fund capital invested in Emerging Markets fell through August end to USD185 billion. This follows a period when EM hedge fund capital rose to a record of USD198 billion through mid-year 2015.
Recent EM losses were led by the HFRI China Index, which declined -7.55 per cent in August, bringing the three month performance drawdown for the Index to -18.5 per cent. As a result of strong gains through 1H15, the HFRI China Index has posted a narrow gain of +0.3 per cent YTD through August. Similarly, the HFRI EM: Asia ex-Japan Index fell by -6.8 per cent in August and has declined -2.3 per cent YTD. Through the end of August, total capital invested in Chinese hedge funds totalled USD50 billion.
Hedge funds investing in other EM regions also posted negative returns in August, with the HFRI EM: Latin America Index dropping -4.2 per cent in August, bringing YTD performance to a decline of -13.8 per cent. This represents the worst drop for the Index since December 2014, although the Index has outperformed Brazilian equities YTD, which have fallen over -32 per cent, while the Brazilian Real has fallen by over -25 per cent against the US Dollar. Total capital invested in hedge fund focusing on Latin America has declined to USD8.3 billion (31.9 billion Brazilian Real).
The HFRI Russia Index declined -2.0 per cent in August, paring the YTD gain for the Index to +6.2 per cent, which tops the YTD performance of Russian equities by approximately 80 basis points (Russian equities have gained +5.4 per cent YTD). Total capital invested in Russian hedge funds declined to USD26.3 billion (1.79 trillion Russian Rouble). Hedge funds investing in the Middle East also fell in August, with the HFRI EM: MENA Index falling -3.4 per cent for the month, bringing the YTD decline for the Index to -4.2 per cent. Total capital invested in hedge funds focused on the Middle East declined to USD3.9 billion through August.
“Emerging Market hedge funds experienced extreme volatility in recent months not only as a function of regional equity and local currency liquidity pressures, but also because of intense structural pressure from local market regulators and government agencies to restrict the ability of any investor to establish short market exposure,” says Kenneth J Heinz (pictured), President of HFR. “While this process has resulted in performance drawdowns in the short term, these dislocations have created opportunities for sophisticated strategies to monetise over the intermediate term. Since inception the performance of EM hedge funds has served as a strong engine of positive contribution to overall hedge fund performance, albeit with a higher volatility profile. As these near term pressures subside, it is likely that EM hedge fund investors will benefit from categorical performance normalisation and mean reversion in these specific regional exposures.”